In the midst of the ongoing cryptocurrency and blockchain craze, OTC Markets Group, a U.S based decentralized stock exchange, has beefed up its oversight and warnings to investors about potential fraud as it continues to see companies boost their stock price by pivoting to crypto.
Distinction between Promotion and Legitimate Listing
The OTC Markets Group, which gets its name from “Over-The-Counter,” is a decentralized marketplace where participants trade with one another directly, without the oversight of an exchange.
In a bold move on March 28, 2018, the company flagged fraudulent businesses which seemed to profit from adding a “popular” extension to their name, in a bid to increase stock prices.
Amongst these include a blockchain company, a battery explorer and a pot cultivating firm.
In the words of R. Cromwell, CEO of OTC Markets Group, “Anonymous, paid stock promotion should have no place in the public markets.”
For perspective, a total of 10,000 companies are listed on OTC’s exchange.
In a statement, the group said that it would start to put up a “Megaphone” icon next to companies that might be sponsored by promoters to look after the welfare of investors.
As of now, a total of fifty-six companies show the warning.
According to OTC, “These illegal promotions harms investors, impedes capital formation and disrupts efficient pricing mechanisms.”
Price Manipulation and Downpour by the SEC
Among the companies most guilty of stock promotion are marijuana and blockchain businesses, the latter of which OTC Markets lists more than one.
Companies like Global Blockchain Technologies Corp. and Block One Capital, are both companies with stocks present on the market. However, the products and services of these firms are not immediately transparent.
Additionally, as long as all the information is displayed and not falsified in any manner, paid promotions are prohibited in neither the US nor Canada.
Promotions are particularly difficult to regulate, as a majority of the time, promoters are based outside the US, and their respective promotions are disclosed to investors via email or text messages.
These instances can result in typical pump-and-dump cases where the promoters cash out during the peak market time, leaving investors dazed and confused.
In the year 2017, the OTC Exchange sued about 27 entrepreneurs and their companies due to their involvement in fake stock promotions that were displayed on a stock insights website Seeking Alpha and other similar web portals.
How Is this Situation Created?
The Canadian economic structure allows companies the luxury of listing on the country’s small stock exchanges quite easily.
This ease of entry is often exploited by zombie shell companies, which play with the confidence of investors in the booming companies, expecting a big payoff in the future. Often, paid stock promotion is a part of the hype of these falsified companies.
This hype ultimately leads to cheating the investors of their money, and more importantly, their confidence in small stock exchanges.
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